Posted On: 6/29/2015 11:57 AM
How Much Do I Need to Retire: Are You Relying on Social Security to Provide You With Enough Additional Income at Retirement?
A History Lesson on Social Security
Social Security was established in 1935 by President Franklin D. Roosevelt and the purpose was to guarantee primary workers a retirement income since companies didn’t provide pension plans. In 1939 the law was expanded to provide an income to spouses and children. Many people still live mainly on social security benefits for many reasons. Perhaps they didn’t save enough for retirement or maybe they were unable to save because their income was just meeting everyday needs.
Social Security Benefits in 2015 and Beyond, and Its Affects On How Much You Need To Retire
A lot has happened since 1935. Life expectancy at that time was 61; today according to most U.S. studies, depending upon gender, it is over 78. The role of social security benefits has changed, and not for the better, because life expectancy is longer. In 1972 the maximum earnings subject to social security was $9,000 and now in 2015 it is $118,500. However, if you make a contribution to your 401(k) or 403(b) it doesn't reduce the amount subject to social security. For example, your earnings are $118,500 but you contribute $10,000 to your pension plan. You are still required to pay social security on $118,500 earnings, not $108,500. In 1977 indexing for wages was introduced so every year the amount you pay into social security increases and the age you can collect full benefits does as well. Originally the retirement age was 65, but based upon current law, it will eventually be age 67. Headlines seem to confirm that social security is eventually going to go bankrupt and the need to create your own retirement income that can’t be outlived is more important than ever.
In the 1980’s, 401(k) plans were established so that employees could save some of their paycheck towards their retirement. The amount put into the plan was not taxed until the retiree withdrew it. Employees could invest and save for their own retirement through this plan and it would help to supplement their social security income. Nonprofit organizations, such as teachers and hospital employees, were eligible prior to the 1980’s to save tax-deferred for retirement through a 403(b) plan. Now savings in 401(k) and 403(b), by employees, is well over several trillion dollars and is growing as the contribution limit is increased.
Don’t Guess on Your Social Security Benefit When Calculating How Much You Need To Retire
Social Security is a combination of your age and your earnings. The younger you are or the higher your income, the more you can expect as a benefit. However, you must track your earnings and estimate your benefits every year. To receive this information you will need to set up an on-line account, go to: www.ssa.gov. Check it and make sure your earnings are accurate. Benefits are based upon 40 quarters of covered earnings and, if your earnings have been misreported, your benefits will be reduced.
The Rule of Thumb for Answering "How Much Do I Need to Retire?"
There is never a clear cut answer to the Rule of Thumb, but usually it is 80% of your pre-retirement income. Look at your net earnings to determine what you are taking home. Many people look at the gross income, but that doesn’t include federal and state income taxes, health insurance or payroll deductions for savings accounts. Are you in a Union? Are you contributing to dues? All of these deductions will distort what you are actually living on.
Are you in debt? Assisting a loved one with medical expenses? Have your medical expenses increased and will your health insurance policy cover all of the expenses? In those cases you may need more than 80% of your pre-retirement income. Calculate your savings as well as your projected Social Security benefit and then you can create a plan that will help you enjoy retirement. Don’t ignore your retirement income needs.
If you're still asking yourself "how much do I need to retire?," then our retirement planning services may help. To get retirement help specific to your situation, let's talk.
Enjoy your week and I look forward to chatting with you again.
